Dubai: The UAE government’s message to businesses is clear: Take taxes seriously, because non-compliance costs.
That is according to tax expert, Amit Chib, who believes that the Cabinet decision will bring transparency to the relationship between taxable businesses and the Federal Tax Authority.
Earlier this month, the UAE Council of Ministers announced the penalties for failing to comply with the country’s new tax laws.
Set fines for failing to adhere to tax laws range from Dh1,000 to Dh50,000, however other violations will incur a penalty of 50 per cent of the unpaid tax, which could be significantly more than Dh50,000.
Observers are quick to point out that penalties are an integral part of any legislation for non-compliance with tax laws.
“Those who do not comply with the tax provisions are bound to face penal consequences … Fines and penalties are the key drivers for a person to be more compliant with the law,” said Pratik Shah, Resident Partner at W T S Dhruva Consultants, a consultancy firm that worked with the Indian government on the Goods and Services Tax (GST), in an email.
Publishing the penalties has the added incentive of showing to people that the authorities are serious about implementing taxes throughout the UAE.
Excise tax, a duty on energy drinks, tobacco products, and carbonated drinks came into effect on October 1, while value added tax (VAT) will launch on January 1, 2018.
Jan Melchior Nawrot, Manager, Excise and Customs Team, Deloitte, department at Deloitte, told Gulf News he is glad that the penalties were published publicly, because “it may mobilise business owners to think more seriously about the potential costs of non-compliance”.
Nawrot added that “hopefully it will convince everyone to take the [tax] implementation issues seriously and drop the notion of VAT being delayed in UAE or not implemented at all.”
Following repeated claims of VAT being delayed, Federal Tax Authority (FTA) Director-General Khalid Ali Al Bustani said earlier this month that these claims were false and the tax was fully on track to launch on January 1.
So how do these penalties compare to the rest of the world?
According to Shah and Nawrot, the penalties released this week are more or less on par with similar laws in other countries around the world.
Both, however, add caveats.
For Nawrot, he insists it is important to remember that “it was quite some time ago when such a major tax implementation was taking place in a whole region, almost simultaneously. The penalties must take the broader context into account”.
Pratik Shah echoed Nawrot’s comments, saying that it would not be fair to compare punishments of tax matured countries with countries that are introducing VAT or a consumption tax for the first time.
The vast majority of countries around the world have established tax programmes. Globally, the Gulf remains one of the last tax-free regions.
According to others, however, the UAE’s penalties are harsher when compared to Saudi Arabia’s, the only other Gulf country to have announced penalties. This is to enforce compliance among many businesses in the UAE who have never dealt with taxes.
When compared with the kingdom, says Amit Chib, Managing Partner, Haynes Path Management Consultancy, “late payment penalties are higher — for Saudi it is 5 per cent to 20 per cent of the tax amount due, while in the UAE it ranges from 2 per cent of unpaid tax to 300 per cent, depending upon period of delay.”
When compared countries further afield such as Germany (1 per cent per month of tax due) or India (Dh11 per day), the penalties seem even stronger.
“The penalties seem to be on the higher side to act as deterrent for non-compliance,” added Chib.
“Tax evasion is not expected to be high”
Tax experts are all in agreement when it comes to tax evasion, however they expect very little deliberate evasion in the UAE, with most cases likely stemming from a lack of preparedness among small businesses.
Nawrot says Deloitte expects that the vast majority of population and businesses will comply with UAE tax laws.
“In my opinion the 'real' fraudsters and criminals will be outliers among the taxpayers due to the diligent and procedural approach the FTA is applying (for example with the excise tax registration). I predict, however, that some taxpayers may simply not prepare in time,” Nawrot said.
This may inflate the non-compliance statistics, he added, while noting that the publication of the penalties is a timely reminder to these businesses to use the next three months to prepare.
According to Chib, the managing partner, given the strong legal framework in UAE, “tax evasion is not expected to be high”.
The issue, however, is around the “capabilities of business whether in terms of accounting and book keeping, training or the resources available to be VAT compliant,” he said, adding: “Businesses may find it challenging to maintain necessary records and systems and thus may end up incurring administrative penalties.”